Home » News » FTSE 100 » Pearson Connections Academy sees strong increases in application volumes following COVID-19 disruptions
digital learning

Pearson Connections Academy sees strong increases in application volumes following COVID-19 disruptions

Pearson PLC (LON:PSON) has today announced its COVID-19 and current trading update.

As we manage the impact of the COVID-19 (coronavirus) pandemic on our business, and with the likelihood of prolonged uncertainty, the Pearson Board has decided it is prudent to pause our share buyback. As we announce this decision, we are also providing an update on the impact on trading, along with the measures we are taking to mitigate these impacts and satisfy the significant uptake in demand for online learning. These actions are underpinned by our strong financial position, with significant headroom on liquidity and scope for further cost savings. 

Our priority remains the health and safety of our employees, learners and customers. Trading to the end of February was in line with our expectations. Since then, as a result of COVID-19, we are seeing three major trends in our businesses:

1.   Uncertainty in our businesses that rely on learners and staff being able to access physical sites, such as Pearson VUE, the Pearson Test of English, US Student Assessments, Higher Education institutions in South Africa and, to a lesser extent, UK qualifications, which will have a negative impact on Pearson profits.  If the crisis broadens, it could also impact our English franchise business in Brazil. We are making both variable and discretionary cost savings to partially mitigate these impacts and are considering further actions.

2.   A significant uplift in the use of our digital products and services, as we enable our existing courseware and assessment customers to migrate quickly to online learning and testing. This will strengthen and deepen these relationships, and should, in time, accelerate the shift to online learning.

3.   Rapidly growing interest in our Global Online Learning businesses, focused initially on our virtual school offerings, but expected also to include fully online university programmes. We believe that this growing interest should translate into increased billings later in the year and thereafter, although the scale will depend in part on how long the disruption to face to face teaching and learning persists.

Restrictions on access to physical infrastructure

Global Assessment

We are the global leader in developing and delivering high-stakes tests via the world’s most comprehensive network of highly secure test centres in over 180 countries. As a result of the outbreak, the majority of Pearson VUE test centres are closed from now until the middle of April. We are evaluating local regulations around re-opening sites to address essential testing services such as for health care workers. It is estimated that the financial impact of these closures will be to reduce 2020 operating profit by approximately £25m to £35m. If closures last longer than the period announced above, then we would expect an operating impact of similar scale for each additional month partially offset by cost actions we would take. Tests run throughout the year providing time for pent up demand to strengthen the performance once the test centres are re-opened. We are also working with clients who are able to take advantage of our VUE online proctoring offering.

We are the largest provider of educational assessment services for schools in the US through our US Student Assessment business. With the acceleration of the spread of COVID-19 across the US we have seen a number of states and boards deciding to postpone or waive testing for the academic year. To date, we have seen test cancellations which impact our 2020 operating profit by around £15m after mitigating actions. We believe there is risk of further state test cancellations which could have a similar impact on profit.   

International

In the UK, Pearson offers academic and vocational qualifications including GCSEs, A Levels and BTECs. The UK Government has closed UK schools and announced that the high stakes exams which usually take place in May and June will be cancelled this academic year. We continue to work closely with the Department for Education, Ofqual and the other awarding bodies to implement the plan announced by the UK Government on Friday and support teacher assessment to ensure students receive the qualifications they deserve. In line with the agreed approach we will continue to award qualifications and provide the opportunity to sit exams later in the year and expect any impact on profits to be modest.

We have seen impacts from closures of schools in China and Italy but the financial impact is modest, given the size of our businesses in these countries. The impact to sales of products in other regions is uncertain, especially given that the period for which educational institutions may be closed is unclear, and our sales periods are seasonal.

Uplift in the use of digital products and services

Pearson has continued to make an array of digital learning tools, services and resources available to students, educators and parents affected by COVID-19 school, college and university closures. To find out about more of the things we are doing click here.

Rapidly growing interest in Global Online Learning

The disruption created by COVID-19 is moving many to investigate full time digital learning for the first time. 

Connections Academy, our Virtual School’s business, is seeing strong increases in application volumes for the current 19/20 school year.  For those schools which are still open for enrollment, we’ve seen over 2,000 new applications since early March, compared to around 750 applications for the prior school year. A number of schools which had closed enrollment are re-opening.  We are seeing many administrators and educators reach out to discuss large scale solutions for virtual schooling as well as potential interest from new states which have not previously considered virtual schooling as a choice for students.  

In Online Program Management, we are confident that our high quality, well designed programmes will be highly attractive in a market for online learning that should see stronger growth as a result of the current crisis.

Cost savings

Following the completion of the 2017-2019 restructuring programme, Pearson is a more efficient company than ever before. This allows us to act with agility to ensure our cost base remains appropriate in challenging trading conditions. We have already identified actions to reduce operating expenditure and discretionary spend to partially mitigate the potential impact from COVID-19 and we are actively exploring further efficiencies. We are also exploring whether we qualify for governmental relief in key territories, as a result of the closure of schools and testing centres.

Strong financial position

Pearson has significant financial headroom. We are working to protect our cash flow and are pro-actively managing our working capital. At the end of February, the Company had approximately £1bn in total liquidity immediately available from cash and our Revolving Credit Facility, and we are looking at all options to further maximise liquidity. Our balance sheet is strong, we have low levels of net debt (with leverage of 1.3x net debt/EBITDA post IFRS 16 at the end of 2019) and significant headroom against our covenants*.

Given current circumstances, the Board believes it is prudent to pause our share buyback until further notice. Approximately £167m million of the £350m share repurchase programme has been completed to date.

This year’s planning was undertaken using exchange rates as at 31 December 2019 with a GBP:USD rate of 1.32. A 5c change to this rate typically impacts adjusted operating profit by c.£20m-£25m. The current GBP:USD rate is 1.16.

Summary

While we are experiencing unprecedented times as a result of COVID-19, we have a diversified business with a presence in multiple geographies, a strong balance sheet with relatively low net debt, and we are taking immediate measures to contain our costs and protect our financial position. In the longer term the growing interest in digital products and online learning mean Pearson is well-placed given the investment we have made in this space. 

We will continue to monitor the situation closely and will update the market further as appropriate. We are taking every step to secure future value for all our stakeholders.

The Board remains confident of the long term strategy of Pearson and is encouraged by the growing importance of its global leadership in online learning. 

This announcement contains inside information for the purposes of Article 7 of EU Regulation 596/2014.

* Pearson’s revolving credit facility includes two covenants testing net debt/EBITDA and interest cover both on a pre IFRS16 basis at a maximum of 4 x net debt / EBITDA and a minimum of 3 x interest cover.

Join us on our new LinkedIn page

Follow us on LinkedIn